Lately there have been many questions coming my way in regards to the new Acorns Investing App.
“What do you think about Acorns?”
“Do you recommend the Acorns app?”
Listen folks. We have to stop trying to take the easy way out of things that were a piece of cake to begin.
When we opt for even lazier, we opt for even more expensive.
Lets start from the top:
Acorns is a mobile app that supposedly rounds up your recent spending transactions and invests the rounded up portion.
But for someone to provide this “service”, there is going to be an expense for it. (even though there is no benefit of micro investing in the first place)
The service itself becomes expensive for two reasons: #1 Acorns has to keep track of your spending, calculate the difference and then find someone to pay for this service.
That person is you. This is part of the $1/month fee in addition to .50% of your balance you get to hand over each year.
What does that mean for your money? The below is if someone invested $200/month using www.BKFInvestingSchool.com principals.
And below is what happens when you take a seemingly small, yet actually substantial .50% out of someone’s return over long periods of time using “Acorns”:
Yes, that is a cold hard $139,824 difference between the first return and the second return.
A cold hard $139k taken right out of your pocket.
And it doesn’t even do what you think.
Which brings us to the #2 reason the Acorns service is expensive – starting your investing career off of lies is one of the most harmful things you can do. If you fall for simple tricks, you will fall for larger ones. And they only get more expensive.
If you notice on the Acorns website, the term “virtual” is used to describe this rounding up of transactions. This is because the app doesn’t actually take the rounded up portion of that $3.95 cup of Starbucks you bought. No your checking account nor the transactions you make are not incorporated into to the Acorns app in any way. Its true function is to simply make an automatic transfer from your bank account of whatever dollar amount you want whenever you want.
Which any person on earth can do, for free.
This means that to achieve the same investment regimen, all you would need to do is schedule an automatic transfer of X amount of money from your checking into your TD Ameritrade brokerage account, use the same commission free ETFs and not pay anyone an additional X amount to do so.
Better yet? Now you’ll be able to actually teach your kids how to invest because you know how, vs depending on some app that may or may not be in business in 5 years to do blind allocations on your behalf. You can not pass on an App to your kids and expect to form a wealthy lineage. (to be fair, we’re talking about apps and not website platforms that go more in depth with the process)
We must do better.
Next thing to understand about just how expensive this app is in other areas, is how psychology affects your investment returns.
Sam makes a complete financial overhaul and learns to manage his money. After eliminating his liabilities (his consumer debt) and now that he isn’t paying $1,100 in car loans, credit cards and personal loans, he takes half of that amount to add to his investments each month. ($550/month)
Over 40 years, his portfolio becomes worth $2,953,972.
Chris on the other hand likes the easy way out. He never buckles down to learn to manage his money and instead defers to a random app he heard about on the internet that promises to round up his horrible spending habits while charging him for the ability to do so.
Since Chris continually drowns in monthly liabilities & debt payments instead of getting his life and finances together, he only has about $1/day in rounded up change to invest over those 40 years.
Over 40 years, this becomes $142,098 in the bank.
He blows through this amount with one medical procedure in “retirement”.
Moral of the story: when you’re encouraged to be broke, broke is exactly what you will aim to be.
Let me give you a quick overview on how taxes are paid on traditional investments.
If you buy 4 shares of a mutual fund on March 3rd 2014….and you sell those 4 shares on March 30th 2014, you will receive paperwork from your brokerage account indicating you’ve done so. You would then take that information and plug it into Turbotax or provide it to your tax person.
You or they would then do the math and figure out the net gain (or loss) on that transaction (the date you bought the specific number of shares and the date you sold them) so that you can pay taxes based on the amount. (most brokerages don’t provide this last part to you)
And that’s the semi-easy part.
But now what happens when you buy 4 shares of that same mutual fund on March 4th, 5th, 6th, 7th, 8th, 9th…. and essentially every day of the year? Who calculates and records net profit from these purchases and when you sell them?
Once it gets too overwhelming for you and/or your tax person on 365 purchases a year, how much will you be charged in addition to your normal fee for having a far more complicated tax return than normal? (they charge upwards of $500 for this managing high numbers of stock transactions)
Even worse? Now that we have a multitude of purchases on the front end, what happens when Acorns does its “automatic re balancing” and dividend reinvesting on your behalf? For re-balancing that means you’re triggering a taxable event by selling portions of your investments when you otherwise might not have. (you should be buying and holding for 5 years minimum vs selling frequently)
And for the over abundance of dividend reinvestment? In conjunction with the re-balancing just mentioned?… lets just put it like this… you will be in one bonafied….
Don’t do it to yourself.
Investing is simple. Don’t try to make something simple, simpler by taking away hundreds of thousands of dollars in potential return and forcing yourself into the wrong psychology.
And for damn sure don’t place yourself in an un-needed tax war with the IRS for when you never get around to putting together last years tax return after being overwhelmed.
In reality, nobody gets successful in America by being lazy.
Learn how to invest the right way, here.